Abhijit Banerjee hits one of the problems of aid on the head. But there is another, perhaps even bigger problem than the one he pursues that deserves a digression. Aid is ineffective in the long run without productive investment in new facilities and equipment to create jobs. In education, even if school class size is reduced and the quality of education is increased, aid will lead to either brain drain or misery unless the newly educated can find work. The same need to couple aid with productive investment applies to most other forms of aid, too, including efforts to provide clean water and modern sewage. Clean water raises welfare, but it doesn’t create jobs.
Aid is necessary but not sufficient. Yet hardly a word is said by any part of the aid lobby about the problem of aid and long-term income-generating employment. Why?
One reason is that a big slice of the aid lobby believes that aid recipients can cope with the dearth of traditional jobs by going to work for themselves. They can join a construction crew, or get a microloan and embroider napkins, or form an NGO and help others embroider napkins, much like the handloom weavers of China and India in the 19th century. According to this dreamy ideal, there are no problems in aid afterlife. The folks in the villages and the little people in the towns are entrepreneurial. Laissez-faire.
This way of thinking was popularized by the Nobel laureate Amartya Sen in Development and Freedom, in which he examines two views on development: a “fierce” process, with heavy investments and formidable mills, and a “friendly” process, starring the small holder, involving mutual exchanges and social freedoms. This is big business versus the little guy, big investments that might require state support versus small incremental savings that will save the day.
Unfortunately, the big guys have been winning since the 1890s if not before. The handloom weavers in India and China survived, if at all, by lowering their own wages and moving inland, as far away from British competition as possible. In Japan’s dual economy, much of its wealth comes from the modern industrial sector. Even Taiwan, whose economic success is often attributed to its small-scale firms, built its modern electronics industry from enterprises with over 3,000 workers.
If aid is not tied to job-enhancing investment—especially skilled jobs—it will raise welfare but not income. Hence, it will not sustain itself. This omission of investment, as Banerjee would say, is lazy thinking. Sustainability must be taken into account. If not by Banerjee, then by whom?